The Search for Yield and the Size Premium in Emerging Market Corporate Debt

Abstract

Emerging market corporations have significantly increased their borrowing in international markets after the global financial crisis. We show that this expansion was led by large-denomination bond issuances (bonds with face values exceeding US$300 million, and often exceeding US$500 million). The drastic shift in the pattern of bond issuances reflects increased investor willingness to purchase emerging market corporate bonds so long as they are included in international bond indexes, which require face values of at least US$300 and US$500 million. Inclusion in the index gives investors the advantage of holding more liquid bonds, which also makes them more similar to those issued by U.S. corporates and emerging market sovereigns. Additionally, those bonds allow investors to target performance closer to the market benchmark. After 2008, emerging market firms started facing a new trade-off. They could borrow at a lower cost (a full percentage point lower) by issuing index-eligible bonds, which often imply raising more financing than needed. Or, they could borrow smaller quantities at a higher cost, while avoiding accumulating substantial cash assets. Because the liquidity premium for large-denomination bonds is sizable, many companies have issued them. As a result, larger firms have become more likely to issue them and some smaller firms have issued large bonds for the first time, which has entailed large increases in their post-issuance cash holdings. The overall changes after 2008 in emerging market corporate issuance are not apparent in advanced economies.